David Feldman's book, Reverse Mergers: Taking a Company
Public Without an IPO, now in its third printing, was published in 2006
by Bloomberg Press (available on http://www.amazon.com).
View David Feldman's reverse merger blog at www.reversemergerblog.com.
Joseph Smith and David Feldman are coauthors of PIPES:
Revised and Updated Edition - A Guide to Private Investments in Public Equity
(Bloomberg Press, 2005) available on http://www.amazon.com.
In the News
David
Feldman is quoted in winter 2006 issue
of The Reverse Merger Report about continuing
reverse merger review.
Reverse
Mergers: 2005 Review Activity Continues
at a Strong and Steady Pace
Reverse
merger activity continued at a nearly
even rate throughout 2005, only to taper
off in the fourth quarter as private
and shell companies were deterred by
the Securities and Exchange Commission's
new rules regarding how shell companies
use Form 8-K.
During 2005, private companies completed
179 reverse merger transactions with
fully-reporting shell companies listed
in the U.S., a 4.2% increase from 2004's
168 completed reverse mergers. The fourth
quarter logged 42 mergers, a 5% increase
from the year-ago period, and a 6.7%
drop from the third quarter's 45 reverse
mergers.
The slight slowdown in merger activity
in the fourth quarter was not a complete
surprise to many in the industry. SEC
rules regarding shell companies came
into play in August and November, possibly
discouraging some private companies
from utilizing the reverse merger method.
The new rules now require that a shell
declare its status on the front page
of its Form 10 filings and that it report
a change in its shell status within
four days, accompanied by Form 10-quality
financials of the post-shell company.
David Feldman, a founder and
managing partner with law firm Feldman
Weinstein, attributes the deal flow
to an uncharacteristically strong third
quarter as companies raced the clock
to complete their deals before the SEC
rules went into effect.
"My guess is that there wouldn't be
a downtick in the fourth quarter, so
much as an up-tick in the quarter before
as people rushed to get these deals
done. I have a number of clients that
pushed to get done before the rules
were effective," he told RMR.
Feldman also noted that deals taking
place after the effective date of the
rules are taking more time to complete.
"Companies take a little longer as they
put together these post-merger filings
that are required," he said.
Feldman points to the poor quality of
shell companies as another possible
factor. "A client who is looking to
merge with a shell is up to the ninth
shell they have looked at and rejected,"
he said. "The quality of trading shells
has gone down, and the price demands
have gone up."
Reverse mergers with a total market
cap value of $2.1 billion closed in
the fourth quarter, up slightly from
$2.05 billion in the previous quarter.
The average market cap of companies
that completed reverse mergers was 10.4%
larger in the fourth quarter ($53 million)
than in the third quarter ($48 million).
Chinese companies continued to favor
the reverse merger as a means of accessing
the U.S. public markets during the fourth
quarter, with seven deals between private
Chinese companies and U.S. shells. Chinese
reverse mergers accounted for nearly
15% of all mergers for the quarter and
about 9% of all mergers in 2005.
"I think the Chinese market is
still hot, especially given the reversal
of SAFE regulations that had slowed
things down a bit at the beginning of
the year," says Louis Bevilacqua, a
partner with Thelen Reid & Priest
in Washington.
China's State Administration of Foreign
Exchange (SAFE) issued two regulatory
declarations, Circular 11 and 29, early
in 2005 that made it difficult for businesses
to restructure using an offshore holding
company (see SAFE story, page 8). The
rules are no longer being implemented
and November's Circular 75 has ended
months of uncertainty for venture capital,
private equity, and other foreign investors
in China. SAFE has made it clear that
the efforts by Chinese private companies
to obtain offshore financing are being
encouraged by China's national policies,
according to law firm Morrison &
Foerster.
Bevilacqua was involved in the largest
Chinese reverse merger of the quarter,
based on market cap, between Las Vegas
Resorts Corp. (LVGC.OB) and Winner Group,
a China-based manufacturer of surgical
dressings and other disposable medical
products. On Dec. 16, Las Vegas Resorts
acquired all of the issued and outstanding
stock of Winner for about 42.9 million
Las Vegas Resorts shares, giving Winner
94.7% of the stock. In mid-January,
the company was trading around $5.50
and had a market cap of $245.5 million.
Winner also closed a private placement
after the reverse merger's completion,
raising about $12 million in proceeds.
Private placements closing subsequently
with reverse mergers, so-called "shell
IPO's," are a growing trend. During
the fourth quarter, 12 companies completed
mergers and private placements concurrently,
according to PrivateRaise and other
sources.
"I think the deals continue to
get bigger and better, meaning more
money is invested through a private
placement in public equity [PIPE] that
occurs at the closing of the reverse
merger, and the quality of the operating
company and the PIPE investors continues
to increase," Bevilacqua said.
The next largest Chinese reverse merger
of the quarter was between Conventure
International and privately held Xi'an
Xilan Natural Gas Co., a natural gas
distributor in China. On Dec. 6, Conventure
acquired all of the issued and outstanding
stock of Xilan in exchange for 4 million
shares of Conventure common stock. The
newly combined company changed its name
and ticker to China Natural Gas (CHNG.OB).
The company was trading around $3.75
in mid-January and had a market cap
of $72.7 million.
The smallest Chinese reverse merger
in the fourth quarter in terms of market
cap was between Goldtech Mining Corp.
(GMNC.OB) and privately held China Industrial
Waste Management. China Waste owns 90%
of Dalian Dongtai Industrial Waste Treatment
Co., headquartered in Dalian City, China,
which collects, treats, recycles, and
disposed of industrial waste.
In mid-November, a Goldtech subsidiary
acquired all of the outstanding shares
of CIWM in exchange for 64,000 shares
of series A preferred stock. China Industrial
Waste stockholders acquired about 97%
of the voting rights of Goldtech. The
company's officers resigned at the close
of the merger and Dalian's president,
Jinqing Dong, was named CEO and CFO
of Goldtech. The company was trading
around 23 cents at the time of the merger
and has since dropped by 48% to close
at 12 cents in mid-January, with a market
cap of $930,000.
The largest reverse merger based on
market cap during the third and fourth
quarter closed on Nov. 7 between shell
company ConsultAmerica and private medical
imaging company VirtualScopics (VSCP.OB).
ConsultAmerica acquired all the outstanding
units of VirtualScopics, making the
company its wholly owned subsidiary.
ConsultAmerica changed its name and
ticker immediately after the deal closed.
Rochester, N.Y. based VirtualScopics
also subsequently sold over 4,000 units
in a private placement consisting of
one share of series A convertible preferred
stock, and a detachable, transferable
warrant to purchase 200 shares of common
stock for $4 per share. Each share of
series A convertible preferred stock
is initially convertible into 400 shares
of common stock. Units were priced at
$1,000 each. Proceeds from the initial
sale were over $4.08 million, according
to SEC filings. After a green shoe provision
was exercised, proceeds were bumped
up to $7 million, according to company
management. VirtualScopics, with a market
cap of $506.3 million, was trading at
around $6 in mid-January.
With a market cap of only $670,000,
Left Right Marketing Technology (LRMT.OB)
created the smallest deal of the fourth
quarter after its merger with Strategic
Gaming Investments on Nov. 4. The company
plans to change its name to Strategic
Gaming Investments in the near future.
Strategic owns The Ultimate Poker League,
which runs poker league contests and
related reality television series, according
to SEC filings. The company was trading
around $9.50 in mid-January.
Medical devices and services, and biotechnology
and pharmaceuticals companies accounted
for the largest percentage of reverse
merger deals in 2005. Biotech and pharmaceutical
deals made up more than 8% of the deals
in 2005, and medical devices and services
companies completed just more than 7%.
Energy-related sectors also continued
to post strong deal activity with nine
mergers, or about 5% of the total yearly
deals.
